Editor’s note: Ian Hodge is a regular columnist for Business Reform Magazine, the leading Christian business magazine with over 100,000 readers. Each issue of Business Reform features practical advice on operating successfully in business while glorifying God.
The announcement that K-Mart is about to close 326 stores and shed 30-35,000 workers highlights one of the problems of modern business: You can’t keep getting smaller.
There have been some high-flying executive officers who have developed the reputation of being great shrinkers. The organizations they manage are smaller after their tenure in office than before. The business may be smaller, but as Tom Peters argued some time ago, “You can’t shrink your way to greatness.” Why, then do so many try?
Before we answer that, we need to ask what causes too many businesses to fail at the same time. One or two business failures do not cause an economic recession that affects hundreds of thousands of people.
At the end of the day, an economic recession comes into being when millions decide to do something else with their money. They no longer buy new cars, even at zero percent interest and no down payment. They don’t buy new washing machines, refrigerators and computers. Instead they say, “the old one will have to do us a little longer.” And that “longer” can mean a rather lengthy period for some businesses.
First it affects those with high debt levels. Debt levels in one form or another have soared throughout the past century. High debt levels require high turnover to service the debt, and a severe downturn in business volume can lead to serious problems, as United Airlines has discovered.
Second, it affects those with low productivity levels because they find it harder to compete on price. While prices are market driven, the costs of production are not. These are the result of purchasing power for materials and labor, and labor or machine productivity levels. They are, to a large extent, controllable and often require a little creative thinking to find ways to keep them low or get them even lower. Profit is a combination of prices and costs, and low cost, high profit companies handle recessions better than those with low margins.
The fact that K-Mart is being beaten in the marketplace by Wal-Mart is indicative that shoppers prefer Wal-Mart to K-Mart. If K-Mart wishes to have a long-term future then it must see shrinkage as a short-term measure and have a plan to re-open those 326 stores, either in the same location or elsewhere. In other words, K-Mart has to become more competitive with Wal-Mart. Such a plan will require vision and strategic leadership and ends up being a growth-led recovery rather than a shrink-led recovery.
Ian Hodge and Business Reform are able to offer a range of services that will educate business owners in all aspects of management, services that include our very own do-it-at-home (or at the office) study material. The first series of lessons on finance is now available. For further information, send an email to [email protected]. Learn to develop and maintain management practices that will give your business every chance of success.
